1111 211 1 3 4 An Introduction to Varieties of Capitalism 5 6 Peter A. Hall and David Soskice 7 8 9 10111 1.1 Introduction 1 211 Political economists have always been interested in the differences in 3 economic and political institutions that occur across countries. Some 4 regard these differences as deviations from ‘best practice’ that will 5 dissolve as nations catch up to a technological or organizational leader. 6 Others see them as the distillation of more durable historical choices for 7 a specific kind of society, since economic institutions condition levels of 8 social protection, the distribution of income, and the availability of collec- 9 tive goods—features of the social solidarity of a nation. In each case, 20111 comparative political economy revolves around the conceptual frame- 1 works used to understand institutional variation across nations. 2 On such frameworks depend the answers to a range of important 3 questions. Some are policy-related. What kind of economic policies will 4 improve the performance of the economy? What will governments do in 5 the face of economic challenges? What defines a state’s capacities to meet 6 such challenges? Other questions are firm-related. Do companies located 7 in different nations display systematic differences in their structure and 8 strategies? If so, what inspires such differences? How can national differ- 9 ences in the pace or character of innovation be explained? Some are 30111 issues about economic performance. Do some sets of institutions provide 1 lower rates of inflation and unemployment or higher rates of growth 2 than others? What are the trade-offs in terms of economic performance 3 to developing one type of political economy rather than another? Finally, 4 second-order questions about institutional change and stability are of 5 special significance today. Can we expect technological progress and the 6 competitive pressures of globalization to inspire institutional conver- 7 gence? What factors condition the adjustment paths a political economy 8 takes in the face of such challenges? 9 The object of this book is to elaborate a new framework for under- 40 standing the institutional similarities and differences among the devel- 1 oped economies, one that offers a new and intriguing set of answers to 2 Peter A. Hall and David Soskice such questions.1 We outline the basic approach in this Introduction. Subsequent chapters extend and apply it to a wide range of issues. In many respects, this approach is still a work-in-progress. We see it as a set of contentions that open up new research agendas rather than settled wis- dom to be accepted uncritically, but, as the contributions to this volume indicate, it provides new perspectives on an unusually broad set of topics, ranging from issues in innovation, vocational training, and cor- porate strategy to those associated with legal systems, the development of social policy, and the stance nations take in international negotiations. As any work on this topic must be, ours is deeply indebted to prior scholarship in the field. The ‘varieties of capitalism’ approach developed here can be seen as an effort to go beyond three perspectives on institu- tional variation that have dominated the study of comparative capitalism in the preceding thirty years.2 In important respects, like ours, each of these perspectives was a response to the economic problems of its time. The first of these perspectives offers a modernization approach to compar- ative capitalism nicely elucidated in Shonfield’s magisterial treatise of 1965. Devised in the post-war decades, this approach saw the principal challenge confronting the developed economies as one of modernizing industries still dominated by pre-war practices in order to secure high rates of national growth. Analysts tried to identify a set of actors with the strategic capacity to devise plans for industry and to impress them on specific sectors. Occasionally, this capacity was said to reside in the banks but more often in public officials. Accordingly, those taking this approach focused on the institutional structures that gave states lever- age over the private sector, such as planning systems and public influ- ence over the flows of funds in the financial system (Cohen 1977; Estrin and Holmes 1983; Zysman 1983; Cox 1986). Countries were often cate- gorized, according to the structure of their state, into those with ‘strong’ and ‘weak’ states (Katzenstein 1978b; Sacks 1980; Nordlinger 1981; Skoc- pol and Amenta 1985). France and Japan emerged from this perspective as models of economic success, while Britain was generally seen as a laggard (Shonfield 1965; Johnson 1982). 1 We concentrate here on economies at relatively high levels of development because we know them best and think the framework applies well to many problems there. However, the basic approach should also have relevance for understanding developing economies as well (cf. Bates 1997). 2 Of necessity, this summary is brief and slightly stylized. As a result, it does not do full justice to the variety of analyses found within these literatures and neglects some discus- sions that fall outside them. Note that some of our own prior work can be said to fall within them. For more extensive reviews, see Hall (1999, 2001). Introduction 3 1111 During the 1970s, when inflation became the preeminent problem 2 facing the developed economies, a number of analysts developed a 3 second approach to comparative capitalism based on the concept of neo- 4 corporatism (Schmitter and Lehmbruch 1979; Berger 1981; Goldthorpe 5 1984; Alvarez et al. 1991). Although defined in various ways, neo- 6 corporatism was generally associated with the capacity of a state to nego- 7 tiate durable bargains with employers and the trade union movement 8 regarding wages, working conditions, and social or economic policy.3 9 Accordingly, a nation’s capacity for neo-corporatism was generally said 10111 to depend on the centralization or concentration of the trade union move- 1 ment, following an Olsonian logic of collective action which specifies that 2 more encompassing unions can better internalize the economic effects of 3 their wage settlements (Olson 1965; Cameron 1984; Calmfors and Driffill 4 1988; Golden 1993). Those who saw neo-corporatist bargains as a ‘polit- 5 ical exchange’ emphasized the ability of states to offer inducements as 6 well as the capacity of unions to discipline their members (Pizzorno 1978; 7 Regini 1984; Scharpf 1987, 1991; cf. Przeworski and Wallerstein 1982). 8 Those working from this perspective categorized countries largely by 9 reference to the organization of their trade union movement; and the 20111 success stories of this literature were the small, open economies of 1 northern Europe. 2 During the 1980s and 1990s, a new approach to comparative capitalism 3 that we will term a social systems of production approach gained currency. 4 Under this rubric, we group analyses of sectoral governance, national 5 innovation systems, and flexible production regimes that are diverse 6 in some respects but united by several key analytic features. Respond- 7 ing to the reorganization of production in response to technological 8 change, these works devote more attention to the behavior of firms. 9 Influenced by the French regulation school, they emphasize the move- 30111 ment of firms away from mass production toward new production 1 regimes that depend on collective institutions at the regional, sectoral, or 2 national level (Piore and Sabel 1984; Dore 1986; Streeck and Schmitter 3 1986; Dosi et al. 1988; Boyer 1990; Lazonick 1991; Campbell et al. 1991; 4 Nelson 1993; Hollingsworth et al. 1994; Herrigel 1996; Hollingsworth and 5 Boyer 1997; Edquist 1997; Whitley 1999). These works bring a wider 6 range of institutions into the analysis and adopt a more sociological 7 approach to their operation, stressing the ways in which institutions 8 9 3 An alternative approach to neo-corporatism, closer to our own, which puts less 40 emphasis on the trade union movement and more on the organization of business was also 1 developed by Katzenstein (1985a, 1985b) among others (Offe 1981). 4 Peter A. Hall and David Soskice generate trust or enhance learning within economic communities. As a result, some of these works resist national categories in favor of an emphasis on regional success of the sort found in Baden-Württemberg and the Third Italy. Each of these bodies of work explains important aspects of the eco- nomic world. However, we seek to go beyond them in several respects. Although those who wrote within it characterized national differences in the early post-war era well, for instance, some versions of the modern- ization approach tend to overstate what governments can accomplish, especially in contexts of economic openness where adjustment is firm- led. We will argue that features of states once seen as attributes of strength actually make the implementation of many economic policies more difficult; and we seek a basis for comparison more deeply rooted in the organization of the private sector. Neo-corporatist analysis directs our attention to the organization of society, but its emphasis on the trade union movement underplays the role that firms and employer organizations play in the coordination of the economy (cf. Soskice 1990a; Swenson 1991). We want to bring firms back into the center of the analysis of comparative capitalism and, without neglecting trade unions, highlight the role that business associations and other types of relationships among firms play in the political economy. The literature on social systems of production accords firms a central role and links the organization of production to the support provided by external institutions at many levels of the political economy. However, without denying that regional or sectoral institutions matter to firm behavior, we focus on variation among national political economies.